The Hidden Costs of Oil. U.S. Senate hearing 2006.

[ This post has excerpts from the 2006 U.S. Senate hearing “The Hidden Cost of Oil”.  It is a timely reminder, now that gasoline prices are low and peak oil off the radar, that we are nowhere near the American Energy Independence bragged about currently in Congress.

I’d like to remind everyone of what James Schlesinger, former Secretary of Defense said at two Senate hearings in 2005 and 2006:

By about 2010, we should see a significant increase in oil production as a result of investment activity now under way. There is a danger that any easing of the price of crude oil will, once again, dispel the recognition that there is a finite limit to conventional oil.  In the longer run, unless we take serious steps to prepare for the day that we can no longer increase production of conventional oil, we are faced with the possibility of a major economic shock—and the political unrest that would ensue.” (1, 2)

So here is a little sanity from the past.  Some highlights from this hearing:

Senator Joseph R. Biden, Delaware (now vice-president):  Does anybody think we would be in the Middle East if, in fact, we were energy independent? Is there any American out there willing to give their son or daughter’s life if in fact, we didn’t need anything that the oil oligarchs had to offer? They get that pretty quickly.

Senator Richard Lugar, Indiana, ChairmanIf we blithely ignore our dependence on foreign oil, we are inviting an economic and national security disaster. Most of the world’s oil is concentrated in places that are either hostile to American interests or vulnerable to political upheaval and terrorism.  Oil supplies are vulnerable to natural disasters, wars and terrorist attacks. Reliance on fossil fuels contributes to environmental problems, including climate change. In the long run, this could bring drought, famine, disease, and mass migration, all of which could lead to conflict and instability.

Essentially, we’re talking here about what we think is going to be catastrophe.  Somebody will say, ‘‘Why was there no vision? Why was there no courage? Why didn’t somebody rise up?’’

Maybe if we try some element of pricing that is different from what we do now, without getting into all the political hazards that Joe Biden has discussed, namely, woe be to the person that suggests a 25-cent tax. The [public] would say, ‘‘Why?’’ Or … a little more tax each year, that is even worse, because you invite a congressional candidate or a President to say, ‘‘We’ve had enough of this kind of stuff. I’m going to reduce your taxes. And we’re not going to take a look at a long-term future.’’

Milton R. Copulos, president of the National Defense Council Foundation: A supply disruption of significant magnitude, such as would occur should Saudi supplies be interdicted, would also dramatically undermine the Nation’s ability to defend itself. A shortage of global oil supplies not only holds the potential to devastate our economy, but could hamstring our Armed Forces as well. Last year marked the 60th anniversary of the historic meeting between Saudi monarch King Abdul Aziz and U.S. President Franklin Roosevelt where he first committed our Nation to assuring the flow of Persian Gulf oil—a promise that has been reaffirmed by every succeeding President, without regard to party.

Without oil our economy could not function, and, therefore, protecting our sources of oil is a legitimate defense mission, and the current military operation in Iraq is part of that mission. [My comment: golly, so it isn’t because of Weapons of Mass Destruction?]

One point we have to look at here, in terms of the argument over domestic oil/foreign oil, misses the point.  We’re going to run out of oil. That’s a given. If you take a look at global demand, I don’t care how much we produce.  The Chinese are adding 120 million cars.  If you look at Third World demand alone, in 2025, it is going to require an additional 30 million barrels a day. When you add in the rest of us, it’s 40. And there’s no ‘‘there’’ there. Can’t be done.

  1. Senate 109-860. May 16, 2006. Energy security and oil dependence. U.S. Senate hearing.
  2. Senate 109-64. June 2006. Energy diplomacy and security. a compilation of statements by witnesses before the Committee on Foreign Relations. U.S. Senate.

Alice Friedemann   www.energyskeptic.com  author of “When Trucks Stop Running: Energy and the Future of Transportation, 2015, Springer]

Senate 109-861. March 30, 2006. The Hidden Cost of Oil. U.S. Senate hearing. 53 pages

SENATOR RICHARD LUGAR, INDIANA, CHAIRMAN.  The committee meets today to consider the external costs of United States dependence on fossil fuels. The gasoline price spikes following Katrina and Rita hurricanes underscored for Americans the tenuousness of short-term energy supplies. Since these events, there is a broader understanding that gasoline and home heating prices are volatile and can rapidly spike to economically damaging levels due to natural disasters, terrorist attacks, or other world events. But, as yet, there is not a full appreciation of the hidden costs of oil dependence to our economy, our national security, our environment, and our broader international goals.

We’re aware that most, if not all, energy alternatives have some externality costs. But we’re starting from the presumption that if we blithely ignore our dependence on foreign oil, we are inviting an economic and national security disaster.

With less than 5 percent of the world’s population, the United States consumes 25 percent of its oil.

Most of the world’s oil is concentrated in places that are either hostile to American interests or vulnerable to political upheaval and terrorism. More than three-quarters of the world’s oil reserves are controlled by national oil companies, and within 25 years the world will need 50 percent more energy than it does now.

There are at least six basic threats associated with our dependence on fossil fuels:

First, oil supplies are vulnerable to natural disasters, wars and terrorist attacks that can produce price shocks and threats to national economies. This threat results in price instability and forces us to spend billions of dollars defending critical fossil fuel infrastructure and shipping choke points.

Second, finite fossil fuel reserves will be stressed by the rising demand caused by explosive economic growth in China, India, and many other nations. This is creating unprecedented competition for oil and natural gas supplies that drives up prices and widens our trade deficit. Maintaining fossil fuel supplies will require trillions in new investment, much of it in unpredictable countries that are not governed by democracy and market forces.

Third, energy-rich nations are using oil and natural gas supplies as a weapon against energy-poor nations. This threatens the international economy and increases the risk of regional instability and even military conflict.

Fourth, even when energy is not used overtly as a weapon, energy imbalances are allowing oil-rich regimes to avoid democratic reforms and insulate themselves from international pressure and the aspirations of their own people. In many oil-rich nations, oil wealth has done little for the people, while ensuring less reform, less democracy, fewer free-market activities, and more enrichment of elites. It also means that the United States and other nations are transferring billions of dollars each year to some of the least accountable regimes in the world. Some of these governments are using this money to invest abroad in terrorism and instability or demagogic appeals to anti-Western populism.

Fifth, reliance on fossil fuels contributes to environmental problems, including climate change. In the long run, this could bring drought, famine, disease, and mass migration, all of which could lead to conflict and instability.

Sixth, our efforts to facilitate international development are often undercut by the high costs of energy. Developing countries are more dependent on imported oil, their industries are more energy intensive, and they use energy less efficiently. Without a diversification of energy supplies that emphasizes environmentally friendly options that are abundant in most developing countries, the national incomes of energy-poor nations will remain depressed, with negative consequences for stability, development, disease eradication, and terrorism.

Each of these threats comes with a short- and long-term cost structure, and, as a result, the price of oil dependence for the United States is far greater than the price consumers pay at the pump. Some costs, particularly those affecting the environment and public health, are attributable to oil no matter its source; others, such as costs of military resources dedicated to preserving oil supplies, stem from our dependence on oil imports. But each dollar we spend on securing oil fields, borrowing money to pay for oil imports, or cleaning up an oil spill is an opportunity missed to invest in a sustainable energy future.

Certain types of costs are extremely difficult to quantify, and we understand that many national security risks are heightened by our dependence. But how, for example, would we assign a dollar figure to Iran’s use of its energy exports to weaken international resolve to stop its nuclear weapons program? Yet, we should do our best to quantify the external costs of oil so we have a clearer sense of the economic and foreign policy trade-offs that our oil dependence imposes upon us.

As the U.S. Government and American business consider investments in energy alternatives, we must be able to compare the costs of these investments with the entire cost of oil. Public acknowledgment of the billions of dollars we spend to support what the President has called our, ‘‘oil addiction,’’ would shed new light on investment choices related to cellulosic ethanol, hybrid cars, alternative diesel, and other forms of energy.

Milton R. Copulos, president of the National Defense Council Foundation.

I would like to commend Chairman Lugar for … his leadership addressing our Nation’s perilous energy dependence.

America is rushing headlong into disaster. What is worse, however, is that it is a disaster of our own design.

More than three decades have passed since the 1973 Arab Oil Embargo first alerted the Nation to its growing oil import vulnerability. Yet, despite this warning, we are now importing more than twice as much oil in absolute terms than we did in 1973, and the proportion of our oil supplies accounted for by imports is nearly double what it was then. What makes this dependence even more dangerous than it was three decades ago is the fact that the global market has become a far more competitive place with the emerging economies of China, India, and Eastern Europe creating burgeoning demand for increasingly scarce resources.

Even conservative estimates suggest that nearly 30 million barrels per day of new oil supplies will be required by the year 2025 just to service the developing world’s requirements. When Europe and the Americas are included, the requirement is closer to 40 million barrels per day. It is doubtful that new supplies sufficient to meet this skyrocketing demand will be found from conventional sources.

UNCERTAIN SUPPLIERS.  The top six sources of U.S. oil imports—Canada, Mexico, Saudi Arabia, Venezuela, Nigeria, and Iraq—account for 65.1% of all foreign crude reaching our shores and 38.9% of total domestic consumption. Of these four, Saudi Arabia, Venezuela, Nigeria, and Iraq, provide 38.2% of oil imports and 22.6 percent of total consumption. For a variety of reasons, none of the four I just mentioned can be considered a reliable source of supply.

THE CONSEQUENCES OF DISRUPTION.  The supply disruptions of the 1970s cost the U.S. economy between $2.3 trillion and $2.5 trillion. Today, such an event could carry a price tag as high as $8 trillion—a figure equal to 62.5% of our annual GDP or nearly $27,000 for every man, woman, and child living in America.

But there is more cause for concern over such an event than just the economic toll. A supply disruption of significant magnitude, such as would occur should Saudi supplies be interdicted, would also dramatically undermine the Nation’s ability to defend itself.

Oil has long been a vital military commodity, but today has taken on even more critical importance. Several examples illustrate this point:

  • A contemporary U.S. Army Heavy Division uses more than twice as much oil on a daily basis as an entire World War II field army.
  • The roughly 582,000 troops dispatched to the Persian Gulf used more than twice as much oil on a daily basis as the entire 2-million-man Allied Expeditionary Force that liberated Europe in World War II.
  • In Operation Iraqi Freedom, the oil requirement for our Armed Forces was 20% higher than in the first gulf war, Operation Desert Storm, and now amount to one barrel of refined petroleum products per day for each deployed service member.

Moreover, the military’s oil requirements will be even higher in the future. Therefore, a shortage of global oil supplies not only holds the potential to devastate our economy, but could hamstring our Armed Forces as well.

THE HIDDEN COST OF IMPORTED OIL.  While it is broadly acknowledged that our undue dependence on imported oil would pose a threat to the Nation’s economic and military security in the event of a supply disruption, less well understood is the enormous economic toll that dependence takes on a daily basis. The principal reason why we are not fully aware of the true economic cost of our import dependence is that it largely takes the form of what economists call ‘‘externalities,’’ that is, costs or benefits caused by production or consumption of a specific item, but not reflected in its pricing. It is important to understand that even though external costs or benefits may not be reflected in the price of an item, they nonetheless are real.

In October 2003, my organization, the National Defense Council Foundation, issued ‘‘America’s Achilles Heel: The Hidden Costs of Imported Oil,’ a comprehensive analysis of the external costs of imported oil. The study entailed the review of literally hundreds of thousands of pages of documents, including the entire order of battle of America’s Armed Forces and more than a year of effort. Its conclusions divided the externalities into three basic categories: Direct and Indirect Economic Costs, Oil Supply Disruption Impacts, and Military Expenditures.

Taken together, these costs totaled $304.9 billion annually, the equivalent of adding $3.68 to the price of a gallon of gasoline imported from the Persian Gulf. As high as these costs were, however, they were based on a crude oil refiner acquisition cost of $26.92. Today, crude oil prices are hovering around $60 per barrel and could easily increase significantly. Indeed, whereas, in 2003 we spent around $99 billion to purchase foreign crude oil and refined petroleum products, in 2005 we spent more than $251 billion, and this year we will spend at least $320 billion.

But skyrocketing crude oil prices were not the only factor affecting oil-related externalities. Defense expenditures also changed. In 2003, our Armed Forces allocated $49.1 billion annually to maintaining the capability to assure the flow of oil from the Persian Gulf.  Expenditures for this purpose are not new. Indeed, last year marked the 60th anniversary of the historic meeting between Saudi monarch King Abdul Aziz and U.S. President Franklin Roosevelt where he first committed our Nation to assuring the flow of Persian Gulf oil—a promise that has been reaffirmed by every succeeding President, without regard to party.

I am stressing the longstanding nature of our commitment to the gulf to underscore the fact that our estimates of military expenditures there are not intended as a criticism. Quite the opposite, in fact.

Without oil our economy could not function, and, therefore, protecting our sources of oil is a legitimate defense mission, and the current military operation in Iraq is part of that mission.

To date, supplemental appropriations for the Iraq war come to more than $251 billion, or an average of $83.7 billion per year. As a result, when other costs are included, the total military expenditures related to oil now total $132.7 billion annually.

In 2003, as noted, we estimated that the ‘‘hidden cost’’ of imported oil totaled $304.9 billion. When we revisited the external costs, taking into account the higher prices for crude oil and increased defense expenditures we found that the ‘‘hidden cost’’ had skyrocketed to $779.5 billion in 2005. That would be equivalent to adding $4.10 to the price of a gallon of gasoline if amortized over the total volume of imports. For Persian Gulf imports, because of the enormous military costs associated with the region, the ‘‘hidden cost’’ was equal to adding $7.41 to the price of a gallon of gasoline. When the nominal cost is combined with this figure it yields a ‘‘true’’ cost of $9.53 per gallon, but that is just the start.

What then can we do? The first step is to recognize that we face a two-fold problem. The first part entails assuring adequate fuel supplies for the 220 million privately owned vehicles on the road today. These vehicles have an average lifespan of 16.8 years and the average age of our vehicle fleet is 8.5 years. Therefore, we will require conventional fuels or their analogs for at least a decade, even if every new vehicle produced from this day forth runs on some alternative.

In the near term, say the next 5 to 10 years, we essentially have two options. First, to make the greatest possible use of our readily accessible conventional domestic resources, particularly the oil and natural gas that lay off our shores. We should also consider using some of our 1,430 trillion cubic feet of domestic gas reserves as a feedstock for motor fuels produced through the Fischer-Tropsch process. Indeed, we currently have 104 trillion cubic feet of so-called ‘‘stranded’’ natural gas in Alaska and a pipeline with some 1.1 million barrels per day of excess capacity. Stranded gas could be converted into clean burning motor fuel and transported in the existing pipeline to the lower 48 states.

Another point is to make sure that we do not forget to address non-transportation petroleum consumption. The fact that two-thirds of our petroleum is consumed in the transportation sector means that one-third is not. The opportunities to reduce oil consumption from non-transportation are greater than you might expect.

Take residential energy use, for example. Roughly 12% of distillate use goes to home heating, most of it imported from the Middle East. Yet, there are alternatives readily available that could totally eliminate this use, and at the same time save consumers money. For instance, a developer in Moline, IL, is currently building homes that are between 85 to 90% energy efficient, and meet their heating and cooling requirements with geothermal energy. More important, these homes are being sold for 20% less than conventional housing sold in the same area. So consumers are not only saving energy, they are saving enormous amounts of money.

In the longer term, there are other domestic energy resources that can be brought into play. We have between 500 billion and 1.1 trillion barrels of oil contained in our huge oil shale resources. We have 496.1 billion tons of demonstrated coal reserves—27 percent of the world total. We also have 320,222 trillion cubic feet of natural gas in the form of methane hydrates. This is equivalent to 51.1 trillion barrels of oil. Indeed one on-shore deposit in Alaska, alone, contains 519 trillion cubic feet of natural gas. That is equal to 82.9 billion barrels of oil.

To conclude, while our Nation is in dire peril due to its excessive dependence on imported oil, the situation is far from hopeless. We have the resources necessary to provide our Nation’s energy needs if we can only find the political will to do so.

HILLARD HUNTINGTON, Executive Director, Energy Modeling forum, Stanford University.

Tight oil markets with minimal surplus capacity have made world oil prices particularly jumpy over recent months. In the last 6 months, a series of political and natural events have cascaded around the globe and left their impact on increasingly nervous oil-consuming nations. These developments have been extremely varied and include the following:

  • A thwarted suicide attack in February at the Abqaiq oil processing facility in eastern Saudi Arabia;
  • A string of turmoil in the Niger Delta highlighted by a recent speedboat attack in January by gunmen on the riverside offices of Italian oil company Agip;
  • Antigovernment attempts to disrupt congressional elections in Venezuela culminating in an explosion at an oil pipeline connected to that country’s largest oil refinery;
  • Devastating Hurricanes Katrina and Rita in the United States in August and September.

Their sporadic nature conveys an element of unpredictability and surprise. I have recently coordinated several studies for the Energy Modeling Forum at Stanford University that relate directly to this issue. I would like to share a few observations that I think summarize the perspectives of many (but certainly not all) participants who were involved in the studies. Our forum frequently brings together the leading experts and advisors from government, business, and university and other research organizations to discuss how we can improve analysis of key energy problems that keep policymakers awake at night. In this particular case, the work was done primarily for the U.S. Department of Energy, but we were asked to invite individuals we thought were the leading people on this issue.

Our two studies focused on the risks of another major oil disruption and the economic consequences of oil price shocks. I am also submitting both reports that expand considerably over my brief remarks here today. I will also briefly discuss a third issue: Our dependence on the oil-producing cartel. Although these episodes have made oil-importing countries nervous and have imposed some very high costs on people and infrastructure, they have yet to duplicate the types of oil shocks that were experienced during the 1970s and early 1990s. As a result, their economic impacts have been more tolerable than in the past. Despite recent oil price volatility, for example, real GDP in the United States has grown strongly, by 3.5 percent annually since the end of 2001.

A number of knowledgeable experts, however, are concerned about the very real possibility of much more damaging shocks in the future. A group assembled by Stanford’s EMF thought that the odds of, at least, one very damaging shock over the next 10 years were higher than those of an oil market with some volatility but without such a shock. Although another major oil disruption is not a certainty, its likelihood is significantly high enough to be worrisome. Your odds of drawing a club, diamond, or heart from a shuffled deck of playing cards are three out of four. In the EMF study, the participants found that the odds of a foreign oil disruption happening over the next 10 years are slightly higher at 80 percent. Disruption events included surprise geopolitical, military, or terrorist turmoil that would remove at least 2 million barrels per day—an amount representing about 2.1 percent of expected global oil production. Foreign disruptions of this magnitude would have more serious effects on oil prices and the economy than we have seen with the Katrina and Rita hurricanes. Oil prices, however, would rise more and for longer than a few months or a heating season. In the study, experts estimated the amount of oil lost to the market as the number of barrels removed by the initial disruption, minus any offsets from the use of excess capacity from undisrupted regions. The experts were asked to exclude any releases from the U.S. strategic petroleum reserve, as these actions require separate decisions from the government during an emergency. The approach identified four major supply regions where disruptions are most likely. These regions account for approximately similar shares of total world oil production. Collectively, they account for about 60 percent of total world oil production. The study lumped Algeria, Angola, Libya, Mexico, Nigeria, and Venezuela as the first region, called ‘‘West of Suez.’’ Saudi Arabia was the second region, and other Persian Gulf States—Iran, Iraq, Kuwait, Qatar, UAE, and Oman—were the third. Russia and the Caspian States comprised the fourth region. The riskiest areas were the Persian Gulf countries outside of Saudi Arabia and several countries along the Atlantic Basin, such as Nigeria and Venezuela. The least risky area was Russia and the Caspian States. Although the participants found the possibility of disruptions was lower in Saudi Arabia than in several other vulnerable regions, disruptions there would tend to have larger effects.

In the second study on the economic consequences of a major disruption, we sought to understand how easily the economy could absorb such a shock. Figure 1 shows that oil price shocks preceded 9 of the last 10 recessions in the United States. The solid line indicates the path of inflation-adjusted crude oil prices since 1950. The gray bars denote periods when the U.S. economy was experiencing recessions as defined by the National Bureau of Economic Research (NBER). This finding was first advanced by Professor James Hamilton at University of California at San Diego and has been confirmed by numerous other researchers.

If a large disruption does occur, we can expect very serious economic consequences. Large disruptions, especially if they move inflation-adjusted oil prices higher than experienced recently, will cause unemployment and excess capacity to grow in certain key sectors.

Other researchers, however, think that these estimates underestimate the impacts, because they do not focus explicitly on sudden and scary oil price shocks. These other researchers think that our historical experience suggests that the level of real GNP would decline by more, at 5 percent for a doubling of the oil price. My personal view is that the higher estimate may be closer to what would actually happen if we had a major disruption. That would mean a recession.

Some people think that oil shocks may not be a problem because the Federal Reserve Board could intervene and lessen the impact. I have a great deal of faith in the Federal Reserve Board. They have done a marvelous job in controlling inflation, which places the U.S. economy in a better position for offsetting oil disruptions than in previous decades. I am not yet convinced that they can compensate the economy for a large devastating disruption. They would have to make some important decisions, very quickly, at a time when fears were running rampant. They may also find it difficult to stimulate the economy because nominal interest rates are already very low, not only here but also abroad. For this reason, I think that the United States should seriously consider other types of insurance policies that would allow the Federal Reserve Board more leeway and flexibility in controlling our inflation rates.

As a general rule, strategies that reduce our dependence on oil consumption are more effective than policies that reduce our imports. One should view the world oil market as one giant pool rather than as a series of disconnected puddles. When events happen anywhere in the market, they will raise prices not only there but also everywhere that connect to that large pool. Since reducing our imports with our own production does not sever our link to that giant pool, disruptions will cause prices to rise for all production, including that originating in the United States. More domestic supplies do not protect us from these price shocks. Unfortunately, insurance policies are never free. It will cost us something to implement a strategy that reduces our risk to another major oil disruption. But it will also cost us a lot of money and jobs if we do not adopt an insurance policy and the Nation faces another major disruption.

As a result of the 1970 oil price shocks, we shifted away from oil in many sectors in the early 1980s, but that trend has slowed considerably since then. Moreover, transportation remains strongly tied to oil use. The dependence on oil in transportation not only affects households directly through higher gasoline costs but it also raises the costs of transporting goods around the country.

Our most recent studies did not address a third issue that could influence the costs of using oil. It is sometimes argued that the United States could adopt policies that would try to minimize or break the oil-producing cartel’s control over the market. Our forum addressed this issue many years ago. Although the range of views was wide, our working group conservatively estimated that the hidden cost of oil from this source might be $5 per barrel, or 12 cents per gallon. Several years ago, the National Research Council used a very similar estimate in their review of the corporate average fuel economy standards for automobiles. That estimate is not trivial, but it is considerably smaller than various estimates for gasoline’s hidden costs due to pollution, congestion, and automobile accidents.

In summary, the Nation is vulnerable to another major disruption not because the economy imports oil but primarily because it uses a lot of oil, primarily for gasoline and jet fuel. Even if domestic production could replace all oil imports, which I am not advocating, the economy would remain vulnerable to the types of disruptions discussed here. However, it is very appropriate that this committee focus its energy on this issue. Oil-importing governments have committed significant political and military resources to the Middle East over a number of decades in order to provide regional stability that is critical to world oil supplies. Excessive exposure to oil vulnerability risks in this country increases these costs or reduces the capacity to pursue foreign policy objectives that are critical for mitigating nuclear proliferation, terrorism and other risks that reduce global security. I cannot provide you with an estimate for this political cost of using oil, but it is extremely important.

JOSEPH R. BIDEN, JR., U.S. SENATOR FROM DELAWARE.  For most of us, the costs of oil seem far from hidden. They are right up there on the signs at our gas stations, they are there in black and white on our heating bills.

Those prices conceal the hidden tax we pay to OPEC countries who use their pricing power to charge us more than they could get in an open international market for oil.  In addition, those prices conceal the costs of the security commitments we face to protect the supply of oil from OPEC and other foreign sources. And they conceal the costs to our foreign policy, which has been handcuffed for over half a century by our dependence on oil from parts of the world with very different interests from our own.

Finally, the price at the pump hides the long-term environmental damage—as well as the economic and social disruptions—that will come with global warming. The economic, social, political, and environmental costs we face today—and the costs of dealing with their repercussions in the future—will not stay hidden. There is no free lunch, as economists never tire of telling us. Somebody eventually has to pick up the tab. That is a dead-weight loss for the entire economy. Every watt of electricity from our power plants, every minute we run a refrigerator or air-conditioner, every trip to the store, everything shipped by truck or rail—all those parts of our everyday lives costs more than they should. That leaves us with less to spend on other priorities. It make us poorer—as individuals, as families, as a nation.

But there are real costs to our policies, too, of course. As hard as they may be to calculate, we must try to measure the economic costs of our reliance on oil, especially on imported oil, on oil from countries that are themselves unstable or that promote instability.

[In addition to] the costs of our foreign entanglements to secure that oil, [are] the costs we will incur to cope with the climate change that will result from our use of oil and other fossil fuels.

You and I share a concern about all of the foreign policy implications of climate change, Mr. Chairman. Climate change will alter growing seasons, redistribute natural resources, lift sea levels, and shift other fundamental building blocks of economic, social, and political arrangements around the world. It could spark massive human migrations and new wars over resources. We will pay a price for those, too.

In every one of the areas we will look at today, the near term prospects are grim. The rise of the massive economies of China and India will continue to put pressure on supply, will demand tens of billions in investments, will further complicate global oil and energy politics, and will accelerate the accumulation of carbon dioxide and other greenhouse gases.

Half the world’s population—3 billion people—live on $2 a day. Just to provide them with a little electricity to replace wood and kerosene for cooking, to pump water, to light a schoolhouse—will require more than our current energy system can provide.

SENATOR LUGAR. Let me begin with some topical references to what we’re talking about today that I culled from the New York Times this morning. Three perspectives. The first deals with the problems in Ukraine following the election, but really going back to January 1, when Russia cut off some gas lines and delivery to Ukraine. Ukraine citizens then took some gas from lines that were going across Ukraine to Europe. A 48-hour contretemps occurred. The article describes the very unusual organization that was formed by Russia. It starts with the rather bizarre thought that the head of this organization is in a remote house, and no one has ever heard of him. The problem, however, is acute for the citizens of Ukraine, even as they try to form their government. In large part because the gas was shut off, it is apparent that President Yushchenko lost a great deal of authority. He lost it in two ways, one of which was that his country was cold. People were cold, physically. Their industry, which was fledgling, was stymied. I’ve described this, I hope in not ultradramatic ways, as waging war without sending the first troops across the line, or bombing or strafing. You can ruin, decimate a country by cutting off energy.

I mention that, because this comes in the same paper with the headline, ‘‘Automakers Use New Technology to Beef Up Muscle, Not Mileage.’’  In improving fuel economy, virtually everyone agrees that there is only one way to do it. There has to be a will. ‘‘There’s no shortage of technology,’’ said a senior analyst at Environmental Defense. However, the fact is that the automobile companies have decided the most saleable product is more zoom in the cars. If you want to, at least have something that is marketable, a car that gets off the mark faster, rather than slower, is more desirable. Some would emphasize, ‘‘After all, a large car is safer.’’ So, all things considered, the technology may be there, but the market strategy is really to sell something else, which is somewhat discouraging, you know, given our parlay this morning.

Finally, there is a very interesting profile of the new president, or chief executive, of Exxon Mobil.  He said, ‘‘we are looking for fundamental changes, but that is decades away. The question is, what are we going to do in the meanwhile?’’  His suggestion is: Explore for oil and gas. And it commends finds in Indonesia, for example, which have been significant recently. But then it also points out in the article that it’s hard even for Exxon Mobil, with all of its resources, to find enough gas or oil, day by day, to replenish that which is already being produced.

And this is why the President’s statement, ‘‘We’re addicted to oil, and we have to transfer 50 or 75 percent of our needs somewhere else in a while,’’ is important, because it catches the attention of tens of millions of people all at once; whereas, we capture very few.

Essentially, we’re talking here about what we think is going to be catastrophe.  Somebody will say, ‘‘Why was there no vision? Why was there no courage? Why didn’t somebody rise up?’’ This is the attempt to do that, to have hearings like this in which these questions are raised, and hopefully people who are expert, like you, inform us, who are learners and are trying very hard to see what sort of public policy ought to be adopted, or at least advocated by some of us, understanding that you have to be patient sometimes for some of these things get through two houses and be signed.

Senator BIDEN. Gentlemen, there used to be a song that was popular back in the late fifties, when I was in high school, and I forget who sang it, but the lyrics were—I remember, the lyrics went ‘‘Tick-a-tick-atock. Timin’ is the thing. Timin’ is everything.’’ And it seems to me—and I have been of the view that there is an environmental catastrophe in the making.  But I don’t get the sense that that has been in any way absorbed by the public.

If you look at it optimistically—the idea of an environmental tax is—you first have to convince people there’s an environmental disaster in the making,

To see the correlation between a $10-a-barrel tax, or whatever the number is, and their ability to breathe clean air or have—not have their roses grow in December in New York State.  When you have this conversation at the barbeque in the backyard with your next-door neighbor, who works for the electric company or is—you know, is a salesman for whatever, I mean, what do you—how do you talk to them about it? Or do you?

Mr. COPULOS. I had a recent experience that really brought that home to me. I have an article in the current issue of the American Legion Magazine, dealing with this, and possible solutions, and I’ve had 200 e-mails from members of the legion around the country who’d read the article and responded. And, uniformly, they have expressed concern. They kind of understand it, but the problem is, they don’t know what to do about it, and that’s why they’re asking—that, plus some rhetoric about brain-dead people in Washington not addressing the issue.  It’s not that people don’t ‘‘get it.” Americans are doers. They don’t want you to preach catastrophe. They know there’s a problem. They’re not stupid. What they say is, ‘‘OK, now, what are you going to do about it?’’ We’re a practical people. If we point them in the right direction, ‘‘Look, you can do X, Y, and Z, and it makes real good sense’’. Just do these things, and you can save yourself’’— geothermal heat pumps, for example, day one of installation in every heating zone in this country, you save money if you use a geothermal heat pump.

Senator BIDEN.  What would some guy say if you said ‘‘I’ve just convinced Congress to raise the price of a gallon of gasoline at the pump 35 cents or a dollar’’? Is he going to say, ‘‘Great’’?

Mr. COPULOS. He’s going to say, ‘‘I’m going to vote against him.’’

Senator BIDEN. That’s right.

Mr. COPULOS.  There were only two times—1973 and 1979—when purchases of autos related to mileage—and they both were specifically tied to an absence of energy. We had gasoline lines, and people were shooting each other. And that gets down to a very fundamental point that we have to understand. And that is that it is the availability of energy that drives behavior, not the price. Whatever the price of energy is, we will adjust, sooner or later. The only times prices are a factor is if it’s a shocking price. In Maryland, in several other States, we see electricity prices predicted to go up 72% this summer. Consumers are up in arms, because they see this as a huge spike. But, I’ll tell you what, 6 months after it’s in effect, people will have adjusted, and they won’t have changed their behavior.

Senator BIDEN.  I hope that’s wrong, but I’m afraid  you may be right.  What I’m deliberately and intentionally asking [given] the extent of the problem, the need to deal with the problem, and the fact that those boneheads here in Washington aren’t paying attention to this, and we’re going to all say, 2, 5, 10, 12 years from now, ‘‘My God, why didn’t anybody talk about this?’’ So, we’re all on the same page on—in that regard.

One of the things that seems to sell with average people, as it relates to the notion of whether or not their behavior will be affected by anything, is: Should we be spending more Federal tax dollars investing in alternative energy sources? Should we be doing it through incentives? Should we be doing it through direct loans?

In Huntington’s statement he said strategies to reduce our dependence on oil are more effective than policies that reduce our imports. We should view the oil market as one giant pool, rather than a series of disconnected puddles. Whatever—when events happen anywhere in the market, they will raise prices, not only there, but also everywhere, that connect to the—that large pool. More domestic supplies will not protect us from these price shocks.

The oil companies and others—have this nice mantra,  that the way in which to drive down prices is, ‘‘We’ve got to go out and find more oil,’’ particularly domestic oil, and then we’re not home free, but we’re going to have a lot more control.  For example, we passed an energy bill at the time when the oil companies were having gigantic surpluses, in terms of profit —and I’m not making the populist argument, but just a factual argument. And we decided we needed to give them a $2.5 billion incentive for them to go out and look for more oil. And people here, they drank the Kool-Aid.  They said, ‘‘Yeah, it sounds right, because we’ve got to get more domestic oil.’’ Talk to me a moment about what benefit—let’s assume we were able to discover and produce three times the amount of oil we are now producing domestically—and we found it overnight—that could come online over the next 4 years. We found it in—you know, in the middle of Delaware or, in Maine, in Washington State– in unlikely places.  What would be the effect of that?

Dr. HUNTINGTON. The price is going to rise for everything, and just having more domestic supplies is not going to protect you from that price rise. More domestic supplies is going to help pull down the price of oil on the market. Just by putting that more supply on, we will help the market out that way. So, the price will be lower. And so, that would actually be beneficial. If it was economic, it would be beneficial.

The problem would come in if it was not economic. Then you’re really hiding the cost, in a way. You’re saying, ‘‘Yes, I’m putting on more supply, but it’s really costing the taxpayers a whole lot more money somehow, because we’re giving it a subsidy for it to come on.’’  [ My note: which is what happened, but not with subsidies, but with another financial bubble similar to the mortgage bubble – shale companies went $300 billion into debt. ]

Mr. COPULOS.  One point we have to look at here, in terms of the argument over domestic oil/foreign oil, misses the point.  We’re going to run out of oil. That’s a given. If you take a look at global demand, I don’t care how much we produce.  The Chinese are adding 120 million cars. You look at  just Third World demand alone, in 2025, is going to require an additional 30 million barrels a day. When you add in the rest of us, it’s 40. And there’s no ‘‘there’’ there. Can’t be done.

What we need to do is to facilitate the transition away from a reliance on oil as a motor fuel and in other areas. But to do that, we have another problem. There are 220 million privately owned vehicles on the road today. They have an average age of 8.5 years, an average life span of 16.8 years. So for a decade, because people are not going to junk their cars, you’re going to have to do something to provide them with fuel. That means you need something that can burn in those cars.

Senator BIDEN. Let me conclude by recounting a similar example. In 1974, I was a young Senator  and I got a call from a fellow named Mr. Ricardo, chairman of the board of the Chrysler Corporation, and Leonard Woodcock, the president of the UAW, and he  asked if they could come to see me. And they sat in my office and jointly told me that I could not support the Clean Air Act, because the Clean Air Act was going to put restrictions on tailpipe emissions of automobiles. I’ll never forget Mr. Ricardo looking at me—this was 1974—and saying, ‘‘You don’t understand’’ — we now have 18% of the large-car market. It is our plan, in the next 5 years, to get 35% of the large-car market.’’ So much for management vision about how they were going to move.

RICHARD G LUGAR, INDIANA, CHAIRMAN. Let me just pick up a little bit on… what is being offered to American motorists in this particular year. The New York Times story that I mentioned earlier says that the 1975 Pontiac Firebird could get from zero to 60 miles per hour in 9.8 seconds. The 2005 Toyota Camry can make it in 8.1. Now, the point they’re trying to make is that the developments in the last 30 years have been largely in terms of performance and the ‘‘zoom’’ speed.  The dilemma here is described further in the New York Times story by someone who noted that he would like to get better gas mileage, but he’s been driving  a truck for years, and he’s comfortable in a truck. He doesn’t want a Prius. He wants a truck. And, therefore, even though it does cost more, all things considered, that is his comfort level, his feeling of safety. He doesn’t want to zoom off at 5.1 for the first stretch after the stoplight, but he does really want to have safety and comfort. We’ve been talking, ‘‘Does price at the pump influence people?’’ Probably, somewhat.

Now, I want to zero in on one of the strategic predicaments. And this really has to do with the thoughts that you had, Mr. Copulos, on the Armed Forces. You point out, just historically, that in 1983 the implicit promise to protect Persian Gulf oil supplies became an explicit element of U.S. military doctrine with the creation of the United States Central Command, CENTCOM. And their official history makes the point clear, you point out, and I quote, ‘‘Today’s command evolved as a practical solution to the problem of projecting U.S. military power to the gulf region from halfway around the world.’’ And they further have refined the doctrine by saying, ‘‘Without oil, our economy could not function.’’ And, therefore, protecting our sources of oil is a legitimate defense mission. And the current military operation in Iraq really is a part of that mission.

To date, supplemental appropriations for the Iraq war come to more than $251 billion—this is supplemental appropriations, on top of our regular military budget—an average of $83.7 billion a year. As a result, when other costs are included, the total military expenditures related to oil now are $132.7 billion annually. That is a big figure.

But it’s not reflected, in terms of our market economy. The automobile companies have to make their own strategy. So do the oil companies. What I’ve suggested from the New York Times story is their strategy is to use technology for so-called performance and safety, not for what we’re talking about today with regard to disruption or the oil economy or what have you.

Some oil companies say, ‘‘Our job is performance for our stockholders, first of all, those who have invested in this place. And, second, it’s to try to think about the future, and that is getting more of whatever we sell. We’ll do a little bit of research on the side and genuflect in that direction. But that is very long term.  Not this year. We are oil people.’’  That is still, I’m afraid, the prevailing view among major players in this. What I’m trying to figure out—and I’m certain Senator Biden shares this thought—how do we get a recognition that our military doctrine, our national defense, now commits $132 billion a year to the protection of Middle East oil lines? Not just for us, but for everybody else, for that matter.

You, in your paper, even go back to Franklin Roosevelt and his original meeting with the Saudi King in which, essentially, this is the assurance that came, ‘‘If you produce it, we’ll protect it.’’

Americans have not only spent money, but they’ve lost a lot of lives defending all of this. And that is not reflected in the market situations that we’re talking about today.

Do we make an explicit foundation or endowment in which we set aside so much? Because simply to add $1.50 to the price of a barrel or a gallon or so forth may not make it. It may be that my friend, who is in the article, says, ‘‘I still want the comfort of my truck.’’ So, in terms of a market choice, I’m not sure we get there. Maybe some administration will come along and say, ‘‘Listen, folks, this is what our doctrine costs, $132 billion a year,’’ explicitly, ‘‘plus whatever lives we lose, whatever risks Americans take, to keep all this going. Do you like that, or not?’’ As Senator Biden says, our constituents are saying, ‘‘Why don’t you guys do something about $3 gas?  Why are you just sitting there in Washington, fiddling around?’’ This is the big issue out here. If I had a dollar for every Republican banquet I’ve attended in which people, in February, March, or whenever a crisis occurs, come to me and say, you know, ‘‘Why aren’t you doing anything about that?’’

That’s the politics of the country. Why? Because the public recognition of this problem is at that point, that $3 at the pump. They pay it, but they’re irritated. And they think that we ought to perform and get it down. Now, we can say, theoretically, that’s a part of the problem—it goes up, down. It’s forgotten. People go through an upset period, but then they get over it. But, here, you’re looking at climate change, which keeps it going on inexorably, whether we’re having this discussion or not. Or disruptions—you’ve illustrated those in your paper, Dr. Huntington, that are actual facts. Plus, you know, the huge problem that might have occurred in the Saudi refinery if the terrorists actually had gotten down the road and disrupted 13% of the oil supply that day. You’ve indicated we could have as much as a 5% loss in GNP. Well, we don’t have 5% gain in GNP now. That takes us to a negative figure. That takes us to a huge unemployment in our country. The same motorist who wanted the comfort of his van is unemployed, and then the whole agenda of this government changes. How do we bring compensatory payments, safety nets, retraining? What in the world do we do at this particular point? And whatever is on these charts today is sort of forgotten, but it shouldn’t have been, because this is the reason we got to that point.

As a practical matter, how do we translate the wisdom of this testimony into measures that give us some protection?

Maybe if we try some element of pricing that is different from what we do now, without getting into all the political hazards that Joe Biden has discussed, namely, woe be to the person that suggests a 25-cent tax. They’d say, ‘‘Why?’’ Or the thought that you do a little bit more tax each year, that is even worse, because you invite a congressional candidate or a President to come along and say, ‘‘We’ve had enough of this kind of stuff. I’m going to reduce your taxes. And we’re not going to take a look at a long-term future.’’

Dr. HUNTINGTON. One of the ways to look at this hidden cost is as a tax put on people’s purchase of gasoline.  You won’t see a lot of effect in the first few years. The real effect will be in the types of vehicles that people buy later on. [Consumers may not do this right away, but the auto makers will] realize that [autos] need to be more efficient…. That is the important effect.  Let’s say we’ve just decided that a tax is not the way we’re going to go, and that we need another approach. The one way I look at this hidden cost is that it’s a measure of how much you should do in an area. Suppose you want to discourage gas-guzzling vehicles in some manner, or you want to encourage a substitute fuel for gasoline. What it should tell you is that you shouldn’t go above, perhaps, $10 a barrel, or whatever.   You shouldn’t make it more costly than whatever that hidden-cost estimate is.

Senator BIDEN.   It seems to me that American business and industry is much more sensitive to price than the consumer at the pump is. If, in fact, the major or small businesses in my State, realize they can add literally a penny or two pennies to their bottom line by economically shifting to another source of fuel, they’ll do it. They’re much more price sensitive—even though they pass on the price, because they’re competing.  If that’s true, has anybody thought about strategies that deal with that smaller percent of the market, where you won’t get as big a bang for the buck, but they will be more likely to embrace the change that takes place—the incentive offered, or the disincentive? Have there been any studies done?  There seem to be two hidden costs that fall into categories the American public could understand. One is the hidden costs relating to environmental costs. The other hidden costs are defense costs. It seems to me  that the public believes that the defense costs are more real, apparent, and immediate than the environmental costs, even though I think they know there are environmental costs.

Does anybody think we would be in the Middle East if, in fact, we were energy independent?

Is there any American out there willing to give their son or daughter’s life if in fact, we didn’t need anything that the oil oligarchs had to offer? They get that pretty quickly.

So, as you think through the things that we can, or should, be doing— what about focusing on the smaller end of the consumption continuum here—that is, industry? And what about a strategy relating to making the defense piece a more palatable or understandable argument as an incentive to change behavior?

When it gets down to it, we have to come up with concrete, specific ways to fiddle. I mean, you know, it’s not like we can’t talk about this. Assuming the Federal Government has any role to play in affecting this behavior.

 

[ Scorecard on oil dependence or vulnerability mentioned above: Senator Lugar (5), Mr. Copulos (7), Mr. Huntington (4), Senator Biden (1) ]

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